The U.S. economy has picked up momentum in the last decade and has maintained a steady growth rate. As a result, the number of companies filing for bankruptcy has declined. Despite these more favorable economic conditions, some industries such as the retail and energy sectors have seen an increase in bankruptcy filings. Bankruptcy protection remains a critical option for some players in these industries. It is critical that organizations entering a restructuring retain key executive talent in order to maximize the likelihood of a successful emergence from the bankruptcy process.

 

To assist companies entering bankruptcy with their key executive and employee compensation program designs, Alvarez & Marsal has developed a database containing detailed bankruptcy compensation information from the last 14 years. This article describes the methodology utilized in populating the database, addresses relevant bankruptcy rules and presents our general findings.

 

Discover more: An Introduction to the World of Bankruptcy Compensation

 

 

 

 

 

 

 

 

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Taxand's Take

BAPCPA has created a structure by which bankruptcy courts can evaluate compensation plans. However, the courts still retain the discretion to accept or reject such plans, especially for incentive plans designed to escape treatment under Section 503(c)(1). Therefore, in designing incentive and retention plans, companies should make every effort to create plans that are “fair and reasonable.” Not only is it best practice but doing so demonstrates the company’s commitment to management and its accountability to stakeholders.

 

Companies should also be aware of the possible ways to motivate and retain its employees in a distressed company environment. Companies should review the plans they have in place and evaluate the potential ongoing impact of those plans should the company enter bankruptcy protection. Lastly, they should carefully examine any compensation plans implemented at or near the time the company files for bankruptcy to ensure they meet the requirements under BAPCPA.

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